You’ll Never Walk Alone

Sunday saw the third anniversary of the Dubai Metro which has carried a staggering 184 million passengers. The 52 km long Red Line was the start of the operations and has transported 152 million passengers since September 2009 whilst the 23 km Green Line is only one year old.

DIFC is on track as well with latest figures showing office occupancy in the Gate District at 98% and a 41% annual increase in the issue of commercial licences. It is noteworthy that 36% of the regulated member companies are from Europe whilst 26% originate from the Middle East and 16% from North America. As would be expected, 17 of the top 25 global banks, 8 of the top 10 insurers and 10 of the top 20 money managers have a presence in the Centre.

Also improving is the Dubai Gold and Commodities Exchange where August volumes were 153% up on the preceding year with 939,000 trades valued at nearly US$ 35 billion – a jump of 71% compared to last year and 79% on the preceding month.

On the local corporate front, two companies were in the headlines. Dubai-based Shelf Drilling has just signed a US$ 1 billion deal to buy 38 oil rigs from the Swiss company, Transocean, in what is expected to be an 80% cash sale and 20% via seller financing. The second, Etisalat reported that it was selling most of its 13.29% stake (at a 9% discount) in the Indonesian telecom, XL Axiata, bought in 2007 for US$ 502 million. This could be the start of several divestments by the company which reportedly spent US$ 12.5 billion between 2004 and 2009 on acquisitions and investments.

The Dubai Financial Market had another flat week but ended up 18 points at 1574 from a Sunday start of 1556. So far this year it has seen an impressive 16.3% gain – an indicator of the growing confidence in the Dubai market. Year on year the market is 7.75% in front.

Just as turgid is the usual summer slowdown in the hospitality sector with Dubai hotel occupancy levels dropping in July to 70%, being further exacerbated by the start of the holy month of Ramadan. However there was an increase in the Average Room Rate (ARR) – up 6.4% to US$ 189 but with the inevitable decrease in food and beverage revenues over this period, it came as no surprise to see an 8.2% reduction in TRevPAR and GOP/PAR dropping 30% to US$ 45.

This sector will receive an extra boost early next year when Dubai hosts the American Society of Travel Agents International Destination Expo in April. It is expected that over 700 travel agents will attend and it will go a long way to promoting Dubai as a first class tourist destination in a country which has now become the emirate’s 4th most productive source market for travel.

News that yet another hotel is being developed – this time the world’s largest hotel provider, InterContinental,  is set for a late 2013 opening of a 132 room and 196 residential suite hotel in the Dubai Marina.

On the retail side, Nakheel has announced that it has completed the pre-letting of 88% of the leasing space available in its US$ 270 million extension to Dragon Mart, already the biggest Chinese shopping hub outside of that country. The remaining space has already been reserved for international retailers. When completed in Q3 next year, the complex will more than double in size to 330,000 sq mt.

Further evidence of the confidence returning to Dubai shopping came with MAF announcing a 10% hike in consumer spending at its local malls including Mall of the Emirates and Deira City Centre. As retail accounts for over 30% of Dubai’s GDP, this can only be seen as positive for both MAF and Dubai.

The impact of the European economic problems was evident in there being little or no growth in Dubai’s trade with the EU. H1 exports were up by 16% to US$ 1 billion, imports flat at US$ 16.6 billion and re-exports up 9% at US$ 3.3 billion. As overall trade was almost identical to H1 2011 at US$ 21 billion, it is a good job then that Dubai does not have to rely on Europe but was saved by impressive growth in other markets as global non-oil trade showed an impressive 12.1% hike to US$ 163 billion.

There was conflicting news this week from two separate reports. The first from Saudi’s National Commercial Bank indicated that UAE’s real GDP will grow 3.1% this year with much the same for the next two years. The other, from the UAE Central Bank, projected an even better result in 2012 indicating a 4.0% increase. Earlier in the year, the IMF was predicting a 3.5% growth whilst the UAE Ministry of Economy expected only a 3% growth. As long as one of these is correct then we will have had an impressive 2012.

The main message seems to be that Dubai and the UAE have recovered well from the loan defaults and real estate implosion that occurred following the GFC. For example, the country’s fiscal surplus has widened to nearly 4.7% (from 2.9%) as has its current account to 10.8% (from 9.2%). It is expected that the 2012 inflation rate will be up to 1.1% (from 0.9%) with slight increases to 1.5% and 1.7% over the ensuing two years.

A report from BNC confirmed UAE’s premier position as the Gulf’s largest construction project market – currently totalling a staggering US$ 680 billion of which 62% or US$ 435 billion are on hold. Another bank report (this time from the National Bank of Kuwait) blames the cancellation of mega projects in Saudi Arabia (US$ 958 billion as of last October) and UAE (US$ 354 billion) for a third successive annual decline in Foreign Direct Investment. Following its zenith in 2008, when FDI into the GCC stood at US$ 60.3 billion, the 2011 figure shows an annual 35% decline to US$ 25.9 billion. (Despite this, FDI into the UAE has actually grown since 2009). Not unexpectedly, FDI outflows showed a 53% annual increase to US$ 218 billion.

The local banks still have a significant exposure to real estate which comprises about 21% of their net loans equivalent to US$ 63.2 billion. Of this balance, 45% (US$ 28.5 billion) relates to individuals, 31% (US$ 19.5 billion) to corporate investors and 24% (US$ 15.2 billion) to developers.

The official US government export credit agency, Ex-Im Bank has underwritten a US$ 2 billion loan to the UAE nuclear power plant, Barakah One, in relation to US equipment and service providers. This will provide a welcome additional 5,000 jobs in the US. Last year, the bank provided US$ 415 million worth of export credit and has a current exposure in the UAE of US$ 3.7 billion.

The economic climate in the US is worsening and set to deteriorate even further by the end of the year. Furthermore the so-called fiscal cliff – proposed tax increases and US$ 480 billion public sector spending cuts due for early 2013 – has the potential to wreak more havoc on the global economy than the eurozone crisis. If left unchecked, this will be a precursor of a major recession and will see the US lose its much coveted AAA credit rating.

Even now, the economic slowdown is beginning to hurt the US with its July trade deficit growing 0.2% to US$ 42 billion. More worryingly was the fact of record trade shortfalls with China (US$ 29.4 billion) and the EU (US$ 12 billion). Exports fell 1% to US$ 183.3 billion whilst imports were at US$ 225.3 billion – a drop of 0.8% from June. In addition, August payroll figures were horrific coming in at only 96,000 new jobs created. It does appear that additional monetary policy action – QE3 – is badly needed – at least for a short-term fix.

On the other side of the Atlantic, Spain’s Mariaono Rajoy appears to be biting the hand that feeds him by declaring that he will not permit the EU and the ECB to dictate terms as a condition for buying that country’s bonds. The fact that he has broken election promises and that he has to go back to the polls by 2015 may be a reason for his intransigence.

This week has seen the 9/11 anniversary, US whistleblower Bradley Birkenfield receiving US$ 100 million for lifting the lid on tax fraud at UBS and the recognition of a major cover up by authorities relating to the 1989 Hillsborough football tragedy involving Liverpool FC. You’ll Never Walk Alone but unfortunately many have to when trying to discover the hidden truth.

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